ISER backs Revenue on tax impact

Scott Goldsmith, the University of Alaska’s venerated senior economist, has stepped into the political snake pit of the oil tax repeal debate.

Goldsmith is well known for his study of Alaska fiscal trends, which have been underway for almost two decades, but his new study comparing Senate Bill 21, the oil production tax regime enacted by the Legislature in 2013, with the tax that preceded it known as ACES, Alaska’s Clear and Equitable Share, has stirred a tempest in the political community.

A key finding in Goldsmith’s study is that at current oil prices and production costs, the two taxes bring in about the same amount of revenue. Opponents of the tax change have labeled it a “giveaway” to the industry.

A hotly contested referendum question will appear on the state primary election ballot in August. A campaign to defeat the referendum, “Vote No on 1” has been fired up, while a campaign to defend it, “Vote Yes! Repeal the Giveaway” also has formed.

The debate will be charged and contentious, with supporters of the repeal arguing the tax change gives away too much, while supporters of SB 21 say the change was necessary because badly needed industry investment was leaving Alaska because of ACES, and that the decline in oil production from the North Slope was accelerating.

Since the Legislature approved the tax change in April 2013 — it became effective Jan. 1 — industry activity on the Slope has picked up, and more barrels of oil are being produced compared with what had been forecast.

Goldsmith attempted to sort out the differing claims and his work, in general, validated conclusions the state Department of Revenue had reached earlier this year, and briefed to legislators in February.

So far no one has challenged Goldsmith’s calculations although one critic, who asked not to be identified, complained that “the analysis is written like a press release for the industry,” rather than an academic paper.

Others complained about the venue for the release of the study, a meeting of Resource Development Council members, who generally opposed ACES and support SB 21, and the fact that Northrim Bank, which has supported SB 21, contributed to the university to support Goldsmith’s work, although the bank’s support goes to a range of research initiatives on the Alaska economy.

A more focused criticism from state Sen. Hollis French, D-Anchorage, who is Senate Minority Leader and a critic of the tax change, is that the analysis is incomplete and doesn’t present the overall picture because it doesn’t adequately present revenues lost during a period of high prices.

For next year, however, the state Revenue Department has found the new tax will bring in more revenue in fiscal year 2015 than ACES would have, under the oil prices and costs that are now estimated. The latest estimate is that SB 21 will bring in $1.74 billion in FY 2015 compared with $1.625 billion had ACES still been in effect.

However, prices and costs are unpredictable and in some years ACES may have brought more revenue, while in some years the new tax under SB 21 will yield more, Goldsmith said in his analysis. Department of Revenue analysts also have said that that would happen.

Goldsmith’s study is on the university’s Institute of Social and Economic Research website, as Web Note No. 17, “Alaska’s Oil and Gas Production Tax: Comparing the Old and the New.”

While the new tax law might impose higher taxes on companies in some years the industry still supports the change, Goldsmith told the RDC, because the new tax can be modeled more easily and is, therefore, more predictable for the companies as they plan future investments.

“Also, under ACES there was no tax reduction for ‘new’ oil,” developed by the companies, Goldsmith told the RDC. That incentive, which isn’t given unless there are actual new barrels produced, is a key difference between ACES and SB 21, he said.

Broadly, Goldsmith’s conclusions are that the tax change had little to do with large budget deficits the state will experience this year and next year. Those revenue reductions are due mainly to declines in oil prices and production, and higher production costs, Goldsmith said.

Also, if oil prices stay in the same range as today, which is expected, and production costs continue to rise, which is also expected, the new tax can be expected to generate more revenue.

However, if oil prices rise and production costs stay the same or drop, the ACES tax would generate more income.

In a separate part of his study, Goldsmith looked at the job-creating effects of new Alaska investment by the industry, which the tax change is expected to generate.

Using a variety of economic analysis tools, Goldsmith found that $4 billion in new industry investment will result in 5,000 new public and private sector jobs per year in the state over 20 years, with more than $300 million per year in additional wages and salaries paid.

In his criticism, French said Goldsmith should have noted that if oil prices do rise again, as happened following 2007 when the ACES tax was enacted, the new SB 21 would result in a large loss of revenue compared with the former tax, French said.

“That’s the giveaway, what we lose during a high price spike,” French said. “Between 2007 and 2013 we earned $8.5 billion as a result of ACES. Had SB 21 been in effect we wouldn’t have that money in our reserve accounts today.”

Another criticism, French said, is that production costs are estimates given to the state by industry and that the Department of Revenue has done no audits of the costs.

“The department is woefully behind on audits,” French said, so the estimates given by the companies should be taken with a grain of salt, for now at least.

In looking at cost increases in his analysis, however, Goldsmith goes to other sources to attempt to validate the trend of rising production costs.

In his talk to the Resource Development Council May 1, Goldsmith cited world industry capital cost indexes which show the oil and gas capital cost index at 230 in third quarter 2012 (in 2000, the base year, the index was 100) compared with a more gradual rise in general inflation (about 130 in late 2012 over 100 in 2000).

Oil field labor costs also have risen, Goldsmith said. He calculates that the per-barrel labor cost was $10 in 2011 compared with less than $2 in 1981. Oil producers also are getting more water, four times as much, and less oil, with fluids being pumped up, Goldsmith told the RDC.

Finally, all these costs, such as handling more water, are spread over fewer barrels of oil being produced. In 1980 the average North Slope well produced 3,500 barrels per day, Goldsmith said. Today the average is about 250 barrels per day. All that drives up the production cost per barrel, which directly affects the net value of the oil against which the state production tax is levied.

Tim Bradner is a reporter for the Alaska Journal of Commerce. He can be reached at tim.bradner@alaskajournal.com.